Good post.
http://www.reddit.com/r/Bitcoin/comments/1uccfz/i_am_a_tax_attorney_here_are_my_answers_to_the/But it is really annoying if applied consequently.
Especially this:
#23: What if I don't maintain records?
You are required by law to maintain records, so failing to do so will result in the assessment of civil penalties against you in a subsequent audit. Penalties aside, it is in your best interest to maintain records because the burden is on you to prove your basis. Thus, if you cannot reasonably establish your purchase price, the IRS will assume it is zero. The same goes for holding period (which would cause you to lose the benefit of the lower long term capital gains rate).
This assumption can be disastrous if you engage in a lot of bitcoin transactions. For example, imagine a day trader who buys $2,000 worth of bitcoins after seeing a specific market signal, which he then sells shortly after for a small profit of $100. He does this only once per day. If he is subsequently audited and lacks the necessary documentation to prove his basis, the IRS will assume it was zero. Thus, he would be taxable on $2,100 of gain every day, instead of just $100. That is a total taxable gain of $766,500 for the year, compared to $36,500if he had kept adequate records.
and this in combination with the previous:
#4: What if I exchange my bitcoins for altcoins?
This is a fair question and implicates what is known as a "like kind exchange." Like kind exchanges do not trigger realization, and therefore are tax-free. Although it's technically possible for bitcoins and altcoins to qualify for-like kind treatment, I think it's exceedingly unlikely. The regulations for like kind exchanges require the two property types to have the same rights, characteristics, and obligations. Whether altcoins and bitcoins meet this test is uncertain, but I would tend to think not. Additionally, if characterized as a foreign currency, bitcoins would be automatically barred from like-kind treatment anyways. Thus, there are two significant legal hurdles that must be overcome before bitcoin and altcoins can qualify as for like-kind status. Although nothing is for certain when it comes to bitcoins, I'm fairly confident that like-kind treatment will fail at one or both of these hurdles. Thus, I would not suggest that you try to qualify such a transaction as a like kind exchange until further guidance on this issue is given by the IRS.
So as I guess most of the altcoin private traders don't keep records anyway and let's suppose a poor student who invested 1 year ago 50$ in 5 BTC. He will start exchange (with a script) 100 times a day for 100 days (the same 5 BTC) trading capital in Namecoin, Litecoin or Peercoin or back to Bitcoin.
By no transaction record the IRS will assume an acquisition price of 0 $.
Let us say by all of the trading efforts no gain was realized. Let's calculate with a BTC price of 1000 $ to be easier.
So in this case there will be 100 X 100 triggers for 5 BTC.
So you have to pay gain tax or capital tax for 100 X 100 X 5 X 1000 $ = 50 million USD by no gain at all.
Did I understood correctly ? If yes, private traders will be treated like the worst criminal just for nothing if you are not paying tax for millions of $ what you never earned.
This example illustrates clearly how terrible the actual financial and tax system is. But surely the tax attorney who posted is not guilty of that. He was just kindly informing us.
